Just over two years ago, Nick Donofrio, senior vice president for technology at IBM (IBM), received a surprise phone call from his boss, Louis Gerstner. The company's CEO had just read a New York Times article about an IBM developer who had released an e-mail program called SecureMailer, written in open-source code - freely distributed software that could be modified by anyone. Though he didn't phrase it this way, Gerstner was essentially calling to ask, "What the hell's going on here?"

Gerstner wanted to know if SecureMailer would compete with IBM's proprietary Lotus Notes. More broadly, he wondered how the company should respond to the growing popularity of open-source software.

Since that phone call, the open-source movement at IBM, which had been a ripple within the organization, has become a tidal wave. IBM has made Linux, the popular open-source operating system, its choice for the Internet. Linux will run on every computer model sold by Big Blue, from its wristwatch-computer prototype to its mainframes. In December, Gerstner announced plans to spend $1 billion in 2001 researching, developing and marketing Linux-based products and services worldwide.

"A lot of companies that embrace Linux view it as an operating system," says Irving Wladawsky-Berger, an IBM vice president who is the top Linux man in the company. "We viewed it as a major game-changer in this whole world of technology."

By changing their game to embrace Linux, IBM execs hope to avoid missing another paradigm shift - as they missed the PC revolution and, to a lesser degree, the Internet. In the early '80s, IBM developed one of the first personal computers but was too focused on maintaining its mainframe business to see the PC tsunami building. Years of financial losses, totaling $8 billion by 1993, resulted. The company also did pioneering work on the Arpanet, the Internet's predecessor, but has watched its networking business all but dry up. Gerstner isn't about to let another big wave pass him by.

"Only the greatest of sinners know how to repent," says John Patrick, IBM's VP of Internet technology. "We've seen this kind of radical shift before. With Linux, we're trying very hard to anticipate the full impact."

But tying the company's fortunes to open-source systems represents a powerful threat to IBM's Unix-based AIX operating system, which was launched in February 1990 and represented about $257 million in revenue for IBM in 1999, according to IDC. The open-source push points to a deeper cultural shift within Big Blue, reflecting changing attitudes about innovation, software development and intellectual property.

Created by Finnish college student Linus Torvalds in 1991, Linux is an open-source operating system; unlike Microsoft (MSFT)'s Windows, its source code is available for anyone to use and alter, as long as they in turn freely broadcast their changes. Advocates say open-source software is more secure, reliable and flexible than closed, proprietary programs. Long popular among hard-core technologists, Linux is now the fastest-growing server operating system in the world, IDC reports.

Like the wider open-source movement, IBM's open-source efforts began at the grass roots. For years, engineers in its various divisions dabbled in open-source projects, known as "skunk works," and communicated via an internal IBM e-mail list. At the same time, an IBM programmer in Germany was tinkering with Linux on mainframes. As early as 1995, IBM Research worked with outside engineers to port Linux to the company's PowerPC. Things started heating up in 1998, when Gerstner noticed SecureMailer and when IBM released its WebSphere application server based on the open-source Apache Web server.